Yet as recently as November 2019, the Indonesian government made a sudden and large increase to royalties on nickel ore production. This decision has received immense opposition from the mining industry. In just a few days, starting on April 26, these higher royalty rates will go into effect. These will be set at either 14% or 19%, depending on current price levels. This new structure is a significant increase from the previous royalty rate of 10%.
The new royalty framework seeks to ensure that Indonesia’s mineral resources provide a fair share of revenue to Indonesians. The government argued that these changes are sorely needed to promote long-range economic growth and sustainable development in the region’s largest economy. State officials say the much higher royalty rates are needed to make up lost revenues for public services and new infrastructure projects.
Beyond nickel, the government intends to raise royalties on other minerals, including coal, gold, copper and tin. The nature of these changes will be determined by the market prices for their emissions as well as the government-imposed rules surrounding their permits. In most cases, these royalties are set to be doubled, more than halving the profitability of mines operations from coast-to-coast.
Though the government continues to claim that all of these royalty increases will be good for the economy in the long run, those in the industry have been alarmed. Critics have cautioned that surging production costs threaten to drive away investors and threaten Indonesia’s mining sector. This would lead to reduced domestic output and significant job losses. They worry that this type of policy would spoil the competitiveness of Indonesian minerals in international markets.
The backlash from industry representatives highlights the delicate balance that the government must maintain between generating revenue and fostering a favorable investment climate. As higher royalty rates are implemented across multiple leases, it is time for the government and industry leaders to begin the conversation. They must unite now to address these critical issues.